Regulators get tough on 'too big to fail' institutions

Top management would be fired, shareholders would be wiped out and bondholders could expect to lose massively in any future meltdown of a major bank, according to a UK and United States plan revealed yesterday.

Paul Tucker, deputy governor of the Bank of England, and his counterpart on regulation in America Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, outlined the tough measures they will take if one of the top dozen banks in the UK and US were on the brink of failure.

"The 'too big to fail' problem simply must be cured," said Tucker. "We believe it can be and that this joint paper provides evidence of the serious progress being made."

Although the US and European Union are developing separate legislation to deal with the "too big to fail" banks, the announcement makes it clear that the UK believes it must work equally closely with the States because so many of the dozen banks covered by them are big in both countries.

In their paper Mr Tucker and Mr Gruenberg state: "Culpable senior management of the parent and operating businesses would be removed, and losses would be apportioned to shareholders and unsecured creditors. Throughout, subsidiaries (domestic and foreign) carrying out critical activities would be kept open and operating, thereby limiting contagion effects.

"Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers."

Tony Anderson, banking partner at legal firm Pinsent Mason, said: "The "top-down" measures foreshadowed would require further internal changes to accommodate additional capital and resolution measures at holding company and operating companies levels within banks.

Of 28 "globally active systemically important financial institutions" four are UK-based; HSBC, Barclays, Royal Bank of Scotland and Standard Chartered.